Bond Law Review | Issue 2 Volume 2 Article 8 12-1-1990 Recent Developments on Winding Up for Inability to Pay Debts Brendan Behan This Commentary is brought to you by the Faculty of Law at ePublications@bond. It has been accepted for inclusion in Bond Law Review by an authorized administrator of ePublications@bond. For more information, please contact Bond University's Repository Coordinator. Recommended Citation Behan, Brendan (1990) "Recent Developments on Winding Up for Inability to Pay Debts," Bond Law Review: Vol. 2: Iss. 2, Article 8. Available at: http://epublications.bond.edu.au/blr/vol2/iss2/8
Transcript
Bond Law Review
| Issue 2Volume 2 Article 8
12-1-1990
Recent Developments on Winding Up for Inabilityto Pay DebtsBrendan Behan
This Commentary is brought to you by the Faculty of Law at ePublications@bond. It has been accepted for inclusion in Bond Law Review by anauthorized administrator of ePublications@bond. For more information, please contact Bond University's Repository Coordinator.
Recommended CitationBehan, Brendan (1990) "Recent Developments on Winding Up for Inability to Pay Debts," Bond Law Review: Vol. 2: Iss. 2, Article 8.Available at: http://epublications.bond.edu.au/blr/vol2/iss2/8
Recent Developments on Winding Up for Inability to Pay Debts
Abstract[extract] There are clearly divergent views expressed by the authorities on this area of law [winding upcompanies] and it is important for the continued confidence in commercial activity that the uncertaintygenerated by the differing criteria used by Courts is removed or substantially reduced. Allowing the Courts todevelop the law using discretionary powers is a dangerous practice because it fuses the judicial andadministrative function. It is unfortunate that the legislature did not take the opportunity with theintroduction of the Corporations Act to provide further statutory interpretation of the controversialprovisions and give guidance to the Courts to develop a clear and consistent policy which would reduce thesubstantial litigation in this area and give confidence to the commercial community and its advisers.
KeywordsCompanies Act 1981, debts, company closures
This commentary is available in Bond Law Review: http://epublications.bond.edu.au/blr/vol2/iss2/8
RECENT DEVELOPMENTS ON WINDINGUP FOR INABILITY TO PAY DEBTS
by Brendan BehanSolicitor, Supreme Court of Victoria
The Companies Act 1981~ (the Act) provides that a Court can only orderthe winding up of a company2 where application is made by a partydefined within s363(1) of the Act on one or more of the eleven groundsdescribed in s364(1) of the Act. One of these, s364(1)(e), allows a creditor,including a contingent or prospective creditor,3 to make application forthe winding up of a company if the company is unable to pay its debts.4
To simplify evidentiary difficulties the Act deems a company to beunable to pay its debts5 if any of the following occur:
1. a creditor, who is presently owed more than $1,000.00, serves on thecompany a demand for payment in writing, signed by or on behalf of thecreditor, and the company fails to pay the sum due, or to secure orcompound the sum, to the reasonable satisfaction of the creditor for 3weeks after service of the demand;
2; execution or other process issued on a judgment, decree or order of anyCourt in favour of a creditor is returned unsatisfied in whole or in part;or
the Court, after taking into account any contingent and prospective liabilitiesof the company, is satisfied that the company is unable to pay its debts.
Despite this apparently simple mechanism and the relatively stablewording of the statute (or its equivalent) both in Australia and England,the interpretation of these provisions has been the subject of extensivelitigation for more than 100 years. Neither the Courts nor the commentatorshave been able to agree upon an interpretation of the law which can beapplied in a predictable manner. Contrary approaches have been adoptedon both minor and substantial issues, even by judges of the same standingwithin the same jurisdiction.6
1 The provisions of the Commonwealth statute have been adopted by each of theStates and Territories in complimentary legislation known as Companies (name ofState or Territory) Code.
2 Defined in s5.3 s363(1)(b).4 s364(1)(e) is s360(1) in the new Commonwealth Corporations Act 1990.5 364(2)6 For example compare Young J in Tecma Pty Ltd v Solah Blue Metal Pty Ltd
(1988) 6 ACLC 1080; with Cohen J in CVC Investments Pty Ltd v P & T AviationPty Ltd (1989) 7 ACLC 1218.
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Effect of ~ncorrect Sum in Statutory DemandIt is not uncommon for a company to dispute a notice of demand onthe basis that the sum claimed is different to the amount actually owed.Recent decisions in New South Wales7 and Queensland8 support theproposition that a statutory demand9 is invalid where the sum claimedis not identical with the sum due. Each of the other jurisdictions,Victoria,~° Western Australia,~ South Australia,~2 Tasmania~3 and theNorthern Territory,~4 have accepted the view expressed by Kaye J in1975 in Re Convere Pty Ltd’5: ’overstatement per se is not sufficient todestroy the validity of the statutory notice or to create a bona fide disputeas to the existence of the debt provided the amount not in dispute wouldentitle the petitioner to a winding up order’.~6
The latter view is consistent with the policy of the section and wouldnot prejudice the company in respect of the disputed amount. Amendmentsto the Act may need to be enacted to achieve consistency in interpretationof ’uniform’ legislation~7 and satisfy the demands of modern commercefor predictability in the law.
Judicial IDiscretien and the Threshold QuestionThe exercise of the courts’ judicial discretion will inevitably lead to somevariation in the decision making process. Use of the discretion is animportant variable in two of the most common proceedings in this area:an application for an injunction to restrain a petition for winding upand an application to stay or dismiss a petition already filed.
Recent cases highlight the difficulty the courts have in defining theparameters of their discretion and its application, for the purposes of ss363, 364 and 367, to the threshold question of standing. This difficultyhas led to inconsistency in the interpretation of the relevance of thecompany’s solvency when seeking injunctive relief.
In the New South Wales decision of Ron Pritchard Pty Ltd v HorwitzGrahame Pty Ltd,~ Smart J, when heating an application for the dismissalof a winding up summons, said:
Where it appears that there is a genuine dispute on substantial grounds thatthe petitioner or plaintiff is an actual, contingent or prospective creditor andthat position will probably continue up to and including the final hearing ofthe petition.., such a petitioner.., lacks the standing necessary to present a
7 Processed Sand Pty Ltd v Thiess Contractors Pty Ltd (1983) 1 NSWLR 384.8 General Welding and Construction Co (Qld) Pty Ltd v International Rigging (Aust)
Pty Ltd (1983) 2 Qd R 568.9 s364(2)(a).
10 Re Convere Pty Ltd (1976) VR 345 and Re Faba Pty Ltd (1989) 7 ACLC 19.11 Mine Exc Pty Ltd v Henderson Drilling Services Pty Ltd (in Liq) (1990) 8 ACLC
51.12 Re Gem Exports Pty Ltd (1984) 36 SASR 571.13 Re pardoo Nominees Pty Ltd (1987) 5 ACLC 496.14 Arafura Finance Corporation Pty Ltd v Kooba Pty Ltd (1987) 6 ACLC 194.15 (1976) VR 345.16 Ibid at p350.17 See 1 above.18 (1988) 6 ACLC 258.
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petition or issue a summons for the winding up of the company... I hold that(the petitioner) lacks the necessary standing and that that position will notchange. In these circumstances it is not necessary for the company to establishits solvency. I have considerable doubt whether the modern practice doesrequire a company seeking injunctive relief of process to provide its solvency.19
His Honour adopted the view of Ungoed-Thomas J in the leading caseof Mann v Goldstein2o that a creditor whose debt is genuinely disputedon substantial grounds lacks locus standi.
Abuse of ProcessSmart J in Ron Pritchard Pty Ltd also agreed with the views of McLellandJ as to abuse of process in L & D Audio Acoustics Pty Ltd v PioneerElectronics Australia Pry Ltd.2~ McLelland J there stated:
Proceedings by a person as creditor for the winding up of a company on theground that it is unable to pay its debts will ordinarily be held to be an abuseof process:
1 if the winding up proceedings are bound to fail... ;
2. if th~ application is made for some improper purpose ... ; or
3. if issues will arise in the winding up proceedings of a kind inappropriatefor the determination in such proceedings,... 2z
Smart J acknowledged the distinction adopted by McPherson J inNational Mutual Life Association of Australasia Ltd v Oasis DevelopmentsPry Ltd z3 between the effect of a disputed debt made the subject of astatutory demand and a debt where no demand is made and insolvencyis established by other evidence. The decision in Community DevelopmentPry Ltd v Engwinda Constructions Co24 was distinguished on its factsand the finding that the defendant was a contingent creditor becausethere was an existing obligation under a building contract to pay whateveramount might be fixed on an arbitration award.
Contrary Views on Standing andSolvencyIn Tecma Pty Ltd v Solah Blue Metal Pty Ltd,~5 a New South Walesjudgment handed down by Young J eight months after Ron Pritchard,26a different approach was taken to the problem of how to deal with adisputed debt which was the subject of a statutory notice. Young J foundthat, independent of the demand procedure, the evidence produced bythe petitioner was sufficient to show on the facts that the defendant wasinsolvent. He prefaced his findings with the observation that the evidenceas to insolvency was relatively sparse, but what there was tended to pointin one direction: ’Once this conclusion (that the company is insolvent)
is reached it is really not necessary to go into the matter of disputeddebts’.27
His Honour cites O’Donovan’s third edition of M~Pherson on CompanyLiquidation28 and McPherson J in the National Mutual Case29 as authorityfor his view. He does not distinguish between petitions based on statutorydemand and proving insolvency by other means; nor does he considerthe threshold questions of locus standi and abuse of process. Despite hisfinding on general solvency, Young J proceeds to consider the affidavitevidence before him as to the genuineness of the dispute. Limitedreference was made by Young J to only a few of the many authoritiesin this area. It is difficult to ascertain his purpose in pursuing the questionwhether a bona fide dispute on substantial grounds existed after expressihghis opinion on the effect of insolvency.
The New South Wales Court of Appeal3° did not clarify the questionof standing nor the ambit of the judicial discretion in this area whengiven the opportunity in Australian Mid-Eastern Club Ltd v Elbakht.3~
The divergent lines of authority on the question of whether or notsolvency is an issue when a company seeks an injunction to restrain thefiling and prosecution of a winding up application were considered byMaster McLachlan in F H Transport Pry Ltd v Ampol Petroleum(Queensland) Pty Ltd.32 In this case the petition for winding up wasproceeded by the service of a statutory demand. The debt in dispute wasto be litigated within one week of Master McLachlan’s judgment. Afterhaving considered Mann v Goldstein33 and other authorities supportiveof the proposition contained therein34 the Master referred to the decisionof McPherson J in General Welding and Construction Co (Qld) Pty Ltdv International Rigging (Aust) Pty Ltd 35 which followed the CommunityDevelopment36 case and considered himself bound to follow the QueenslandSupreme Court.
The Trading Reputation of an Insolvent CompanyIn. General Welding~7 McPherson J asserted:
An insolvent company has no trading reputation or commercial credit capableof amounting to an interest which the law either will or ought to protect byinterposition of an injunctionY
27 Ibid at p1083.28 O’Donovan, ’McPherson’s Law of Company Liquidation’ (LBC 3rd edn 1987). For
further reading see: Corkery (1982) Adel L Rev 61; Ford, ’Principles of CompanyLaw’ (Butterworths 5th edn 1990) pp 756-761.
29 Ibid.30 Kirby P Rogers AJA.31 (1988) 6 ACLC 958.32 (1989) 7 ACLC 262.33 Ibid.34 Stonegate Securities Ltd v Gregory (1980) 1 All E R 241.35 (1983) 2 Qd R 568.36 Ibid.37 Ibid.38 Ibid at p570.
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It is submitted that this view, as an all encompassing proposition, isneither correct in fact nor law by current commercial standards. It isself-evident that a company can be technically insolvent as determinedby the deeming provisions of the Act but still retain assets in excess ofliabilities; have good will and maintain a commercial trading reputation.It is unlikely the opinion of the disputed creditor would be generallyknown. The usual reason a company seeks injunctive relief to preventthe filing of a winding up petition is to avoid the harm that can flowfrom the public advertisement of the proceedings. It would only be inrare circumstances that a company which was insolvent would be ableto successfully challenge the standing of all its creditors who claimednon payment of monies due. Another creditor with standing can replacea disputed creditor on an application as the Courts have held that windingup proceedings are akin to a class action for the benefit of all creditorshaving claims on the company.39
The permutations and combinations of raising funds are virtuallyunlimited and frequently there is a blurring between debt andjequity. Itmay not be just and equitable that a company with complex financialengineering is deemed insolvent when it is unable to pay its debts asthey fall due if its realisable assets exceed liabilities. It is in this scenariothat the judicial discretion could be most equitably exercised.
Statutory InsolvencyThe judicial interpretation of statutory insolvency was considered byBarwick CJ in Sandell v Porter."° He said conclusions of insolvency’generally speaking ought not to be drawn simply from evidence of atemporary lack of liquidity’.41 He continued later: ’it is the debtor’sinability, utilising such cash resources as he has or can command throughthe use of his assets, to meet his debts as they fall due which indicatesinsolvency’.42
In Bank of Australasia v Hall~3 Isaacs J said:If... the debtor’s position is such that he has property either in the form ofassets in possession or of debts, which if realised would produce sufficientmoney to pay all his indebtedness, and if that property is in such a positionas to title and otherwise that it could be.realised in time to meet the indebtednessas the claims mature, with money thus belonging to the debtor, he cannot besaid to be unable to pay his debts as they become due from his own moneys.4~
In Re Tweeds Garages Ltd~5 Plowman J quoted, with approval, Buckleyon the Companies Acts on the issue of commercial insolvency:
That is the company being unable to meet current demands upon it. In sucha case it is useless to say that if its assets are realised there will be ample topay 20 shillings in the pound: this is not the test. A company may be at the
39 Re Anglesea Island Coal and Coke Ltd (1861) 4 LT 684.40 (1966) 115 CLR 666.41 p670.42 p670.43 (1907) 4CLR 1514.44 Ibidat p1514,45 (1962) ch 406.
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same time insolvent and wealthy. It may have wealth locked in investmentsnot presently realisable; but although this be so, yet if it have not assetsavailable to meet its current liabilities, it is commercially insolvent and maybe wound up.46
The complexity and sophistication of financing today raises seriousquestions as to whether the definitions of insolvency established in adifferent era are applicable for modern times. This issue would be less
important if a consistent approach was adopted by the Courts to standingand the parameters of their discretion.
Mann v Goldstein ReinforcedThe questions of standing and judicial discretion were fully canvassedby Cohen J in CVC Investments Pty Ltd v P & T Aviation Pry LtckAmann Aviation Pty Ltd v Pacific Aviation Pty Lta~ Pacific Aviation PryLtd v Amman Aviation Pty Ltd.47 CVC and Amann were associatedcompanies. P & T and Pacific served statutory notices on CVC andAmann and each company obtained an injunction restraining thecommencement of proceedings for winding up. In separate Federal Courtproceedings there was evidence pointing to the insolvency of Amann. P& T sought a discharge of the injunction preventing it from bringingwinding up proceedings (and Pacific made application to wind up Amann).Amann sought injunctions restraining its winding up. P & T and Pacificconceded that there was a bona fide dispute on substantial grounds asto the debts owed but claimed that because Amann was insolvent theyhad standing to wind it up. Cohen J dismissed the proceedings by P &T and Pacific and held that a creditor is required to establish a debt tohave any standing in bringing a winding up application and their petitionwas an abuse of process on the principles enunciated by McLelland J inL & D Audia Acoustics.48 His honour further held that even if there isa ground for winding up in existence it does not give the disputed creditorgreater standing. The solvency of the debtor company may be relevantin the consideration of the Courts discretion where the extent, and notthe existence, of the debt is found to be in dispute:
There is no apparent distinction between the principles to be applied indismissing a petition or summons to wind up on the ground that there is abona fide dispute on substantial grounds and in the granting of an injunctionto prevent such a petition or summons being filed or to prevent the advertisingof the hearing~ In both cases, if it’s established that the petitioner or plaintiffhas or would have no standing to obtain a winding up order then there is nojustification for proceedings being commenced or continued. If the companyis insolvent then it is a matter for a creditor, established as such, or one ofthe persons designated under s363 of the Code, to bring the matter to theCourt. It is necessary for the Court to make a careful scrutiny of the evidencein order to establish the genuineness of the alleged dispute and the substanceof the defence or cross claim. If there is a likelihood that the debt may beowing even in part ~hen the question of the solvency of the company maybecome relevant in the consideration of the Courts discretion.49
46 ’Buckley on the Companies Acts’, 13th edn 1957, p60.47 (1989) 7 ACLC 1218.48 Ibid.49 Ibid at p1224.
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Cohen J distinguished Community Development5o on the basis that itwas a contingent debt. His Honour referred, with approval to thecomments by Ungoed-Thomas j51 on the often quoted statement of JesselM R in Niger Merchants Co v Capper."52
When a company is solvent the right course is to bring an action for the debt:where a company is insolvent, no doubt it is reasonable to wind up thecompany even where the debt is disputed.
Ungoed-Thomas j~3 described this statement as being tentatively phrasedin an apparently unreserved judgment, unreported at the time, in theearly period of the developments of the jurisdiction and, as far as hewas aware, stood alone.
Cohen J commented upon the opinion of McPherson J in the NationalMutual case?4
I do not understand McPherson J to be suggesting that where there is a bonafide dispute as to the whole of the debt then notwithstanding that the plaintiffor petitioner has not established himself as a creditor he is entitled to proceedto wind up the company relying only on insolvency and not having to establishhis locus standi.55
Cohen J expressed strong views on the issue of the creditors ability toprove standing:
The fact that there is a ground for winding up in existence does not give thatclaimant any greater standing. There are a number of grounds under s364 uponwhich the court may make an order for the winding up of a company. Themost common one relied upon is that the company is unable to pay its debts.Nevertheless the Code gives only a limited number of persons a right to havethe company wound up on that or any other ground. It is an abuse of processif a person in bringing proceedings assumes a standing which it does not haveand seeks orders to which it is not entitled?6
Recent Western AustrMian DecisionsPerhaps reflecting the economic difficulties in Western Australia, therehave been four recent cases in that State on the interpretation of the lawin this area. In Mine Exc Pry Ltd v Henderson Drilling Services Pry Ltd(In Liq),~7 Ipp J refused to grant an interlocutory injunction to restrainan alleged creditor filing a winding up petition after serving a statutorynotice. He doubted the genuineness of the debt dispute and found thatit was the extent of the debt and not its existence that was the subjectof the dispute. He viewed the Court’s jurisdiction to grant (an injunctionas not being conditional upon proof of the debtor companys solvency.This is contrary to the views taken by Lucas J in the Community
50 Ibid.51 Mann v Goldstein. ibid.52 (1877) 18 ChD 557.53 Ibid at p772.54 Ibid.55 Ibid at p1222.56 Ibid at p1223.57 (1990) 8 ACLC 51.
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Development case58 and McPhers0n J in General WeMing.59 IppJ providedsome comfort to the views of Lucas J and McPherson J when he saidthat it would be unlikely that an insolvent company would be. able toshow. irrepairable, or at least significant and substantial damage to justifyan injunction.6°
It is submitted that the statutory legal definitions are designed to fulfiltheir statutory purpose. These definitions should not be used for anextended purpose. We have seen that a company can have realisableassets in excess of liabilities and still be legally insolvent because it isnot able to readily raise funds to meet debts as they fall due. The filing,in these circumstances, of a winding up petition and the resultantadvertisements can have the effect of reducing the value the companyhas inter alia, in intellectual property, contractual fights and productgoodwill and may also trigger defaults in other securities.
Ipp J introduced a new and confusing dimension into the debate onthe relevance of solvency when he stated that ’the element of solvencyis also a relevant factor in determining whether a debt is genuinelydisputed. A Court would more readily conclude that the dispute is bonafide when it is shown that the plaintiff is manifestly solvent’.61 Therelationship between a company’s solvency and the genuineness of adisputed debt is not immediately clear.
In another case62 shortly after Mine Exc 63 Ipp J dismissed a petitionby the State Government Insurance Commission of Western Australia(SGIC) to have Bond Corporation Holdings Limited wound up andordered indemnity costs on the ground that the filing of the petition wasa flagrant abuse of process. His Honour held that the debt claimed bySGIC was genuinely disputed on substantial grounds and this was knownto SGIC.
Ipp J accepted the view of Cohen J in CVC Investments~4 that thereis no material distinction to be drawn between restraining the presentationof a petition and dismissing a petition that has already been presented.He acknowledged the potential harm to a company in staying a petitionbecause the filing of the petition is still capable of fixing the date ofwinding up65 and creditors who continue to deal with the company areput at risk pursuant to s368(1) of the Act.
Standing, Abuse of Process and Judicial DiscretionAccording to Ipp J, where it is found that a petitioner does not havestanding, the Court has a discretion to restrain the filing of a petition orto dismiss the petition (as the case may be) on the one hand, or stayfurther proceedings on the other, although the usual order is to dismiss
58 Ibid.59 Ibid.60 Ibid at p53.61 Ibid.62 Re Bond Corporation Holdings Ltd (1990) 8 ACLC 153.63 Ibid.64 Ibid.65 s451.
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the petition. His Honour accepted that even in cases of true abuse ofprocess the Court has a discretion to dismiss or stay a petition althoughthe Court would rarely not dismiss the petition.
It is submitted that the judicial discretion can only be used when thecreditor has standing. A discretion may exist to decide which evidencewill be heard on the disputed debt to determine standing; and a discretioncertainly exists once the creditor has standing even when the extent ofthe debt, and not its existence, are genuinely disputed on substantialgrounds. Ipp J accepts that insolvency is irrelevant to standing but itmay be relevant to abuse of process or to the exercise of a discretion todismiss or stay a petition. He does not expand upon this distinction orexplain its rationale.
In the Western Australian Supreme Court Master White has alsorecently delivered two judgments which give the Court broad discretionsto either grant, dismiss or stay a petition for winding up. In Re SyntheticOils Pty Ltd66 he held that the Court retains the discretion to order thewinding up of an insolvent company even where there is a bona fidedispute on substantial grounds as to the debt. He found as a matter offact that there was no bona fide dispute and ordered the company bewound up. He did not expressly turn his mind to the threshold questionsand overcame the dilemma of conflicting authorities by stating ’ ... it isdesirable that the discretion of the Court should be fettered by any hardand fast rule’.6v
In Re Worldwide Testing Services Pty Ltd,68 Master White was invitedto dismiss a petition on the basis that the petitioner was not a creditorof the company, or, if he was, that his claim was genuinely disputed onsubstantial grounds. The company was insolvent as its business had beensold by a receiver. The petitioning creditor did not file an answeringaffidavit to the company’s claim that the debt was disputed. MasterWhite was unable to assess the merits of the case on the evidence beforehim and stayed the petition pending the resolution of the debt disputebetween the parties. Consistent with his views expressed in the SyntheticOils case69 Master White held that his judicial discretion should not befettered by hard and fast rules and he thought it was just and equitableto stay the petition in this case because, if the petition was dismissedthe petitioner would be unable to recover anything as the debtor companywas not trading and had not traded for some years and there were noother creditors to seek substitution. On the balance of convenience thedebtor would suffer less than the petitioner. Perhaps, more importantlyfor consistency with one line of authorities, he had doubts as to the bonatides of the dispute and as to whether it was in fact a dispute about theextent of the debt, rather than its existence.
ConclusionIt is desirable that this frequently litigated area of law achieve a consistentlypredictable approach from the Courts but recent cases do not giveconfidence that this will occur in the near future. It is clear from the
wording of ss 363; 364 and 367 of the Act-that- the powers given to theCourt are discretionary but, it is submitted, judicial discretion cannot beexercised until the threshold questions are affirmatively answered.
It is submitted that the determination of whether a plaintiff/petitionerfalls into one of the categories in s361(1) of the Act is not a matterwithin the Court’s discretion. Nor does the court have a discretion todetermine whether one of the grounds in s364 of the Act is established.The discretion lies in determining the disposition of the hearing oncethe matters have been judicially decided and discretions will exist as tothe evidence to be heard to determine standing and whether the debt isbona fide disputed on substantial grounds.
There are clearly divergent views expressed by the authorities on thisarea of law and it is important for the continued confidence in commercialactivity that the uncertainty generated by the differing criteria used byCourts is removed or substantially reduced. Allowing the Courts todevelop the law using discretionary powers is a dangerous practice becauseit fuses the judicial and administrative function.
It is unfortunate that the legislature did not take the opportunity withthe introduction of the Corporations Act to provide further statutoryinterpretation of the controversial provisions and give guidance to theCourts to develop a clear and consistent policy which would reduce thesubstantial litigation in this area and give confidence to the commercialcommunity and its advisers.
